Large investors refuse to sell this market

Kevin Marder is a guest columnist and a co-founder of MarketWatch. He is
principal of Marder Investment Advisors Corp. and a contributor to
The Gilmo
Report. Previously, he served as chief market strategist for Ladenburg Thalmann
Co. and developed institutional fixed-income risk management software for
Capital Management Sciences.

For all of the handwringing in some quarters, the Nasdaq Composite is down all of 1.7% from peak to trough of this soft patch. The S&P 500 appears to be doing much worse, however, even if it is off a meager 3.2% from high to low.

Institutional participants have not shown much interest in selling this market, as the Nasdaq chart below indicates. Monday appeared to be the start of something on the downside, but buying kicked in during the first five minutes of activity to bring prices well off their lows by day's end.

The mark-ups are being driven by expectations of a brighter economy through the first half of 2014. While monetary accommodation is clearly a factor, if it was the only factor, it is doubtful you would be seeing defensive segments such as consumer staples drastically lag the performance of cyclical areas. Gold would likely not be lagging as it has. If the economy was truly thought to be joined at the hip to quantitative easing, with the prospect of a return to Japan-style deflation, defensives would curry favor.

The below chart shows the relative strength of cyclicals to staples. The market is clearly betting on an economic recovery/expansion, not a slowdown.

The Four Horsemen of the liquid glamours, so named due to their being the leading lights among institutional players seeking go-go growth with thick liquidity, act as the best compass of large-investor activity. LinkedIn US:LNKD
may have paused to catch its breath over the past three weeks, but considering where it came from (up as much as 133% since early this year), it deserves a break.

Netflix NFLX, -2.29%
has also paused, a few weeks ahead of its earnings release. If the action here has been on the staid side, staid is always preferable to fade. Seventy-seven percent in five months is nothing to sneeze at.

And then there are the bad boys of the Four. Facebook FB, -1.82%
up a cool 100% in 10 weeks, has successfully outgrown its "fakebook" moniker in the wake of its infamous IPO. A look at the chart below shows next to no institutional selling of any consequence since the July 25 gap and go.

Ditto for Tesla Motors TSLA, -3.03%
the über glamour of the current cycle. Shares of the electric-vehicle producer have been more hospitable to speculators seeking an entrance on the way up. Specifically, on two occasions, price paused to form sideways congestion areas of about four weeks each.

Some players no doubt passed on the setup due to the stock already having made a big move. Instead of kicking oneself, the post mortem analysis of one's activities in a bull market can instead provide rich learning opportunities from which to benefit in the future. One can do this while kicking oneself.

(As one example of this, this participant ignored Cisco Systems' CSCO, -4.02%
breakout in the fall of 1990 because the company was largely an unknown. The rest was history. Lesson learned: Younger companies with "something new" should be embraced, not cowered from, as these tend to be the most outstanding leaders in any bull market. This assumes the earnings prospects and technicals are supportive.)

Regarding TSLA, as someone said the other day, we've seen this picture before, and it didn't end well. True, but that does not mean the game cannot be played. Just play it on your own terms. Bear markets are usually not pretty for the glamours that tacked up the biggest gains in the preceding bull. In fact, the average big winner corrects 73% in the ensuing bear.

Play. But make sure there is a seat when the music stops.

Among the names, Actavis US:ACT
is a generic drug maker formed by the merger of Watson Pharmaceuticals and a European concern. Especially encouraging is the acceleration in earnings-growth estimates for this year and next. Most analysts see 2013 growth of 39% followed by 2014 growth of 50%. Notably, the stability of past earnings growth has been very high for a company growing at this speed. Over the last several years, it has shown a 7% standard deviation, when outfits of this ilk tend to be closer to 30% plus.

As for the technicals, relative price strength picked up beginning in March. Price is about 2% above its recent ascending structure, and can be entered around Monday's closing level of 144. As always, a reasonable stop-loss should be used to mitigate the risk of being incorrect.

Institutions show scant compunction to sell this market. This is evident by charts of the averages and Four Horsemen, not to mention numerous other glamours. Notwithstanding this, the speculator in momentum titles would do well to recognize the dearth of technically attractive setups. This necessarily limits the number of suitable, fresh-money buys.

The views contained herein represent those of Marder Investment Advisors Corp. ("MIAC"). At the time of this writing, of the stocks mentioned in this report, Kevin Marder and MIAC, held no positions, though positions are subject to change at any time and without notice. This information, which may have been previously disseminated, is issued solely for informational and educational purposes and does not constitute an offer to sell or a solicitation of an offer to buy securities. The information contained herein is based on sources which we believe to be reliable but is not guaranteed by us as being accurate and does not purport to be a complete statement or summary of available data. Past performance of any security or strategy is not a guarantee, nor is it necessarily indicative, of future results. Opinions expressed herein are statements of our judgment as of the publication date and are subject to change without notice. Entities including but not limited to MIAC, its members, officers, directors, employees, customers, agents, and affiliates may have a position, long or short, in the securities referred to herein, and/or other related securities, and may increase or decrease such position or take a contra position.

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